Emerging Market Fundamentals Overshadow Currency Turmoil

After a healthy start to the year, emerging markets (EM) have struggled, given tariff concerns and a stronger U.S. dollar. Most recently, Turkey’s diplomatic and political struggles have devolved into a currency crisis that has weighed on the world’s developing markets. As shown in our LPL Chart of the Day, the collapse of the Turkish lira, stemming from these woes, is a variation on issues plaguing several EM currencies this year.

“Recent events in Turkey have been understandably unsettling for investors,” according to LPL Research Chief Investment Strategist John Lynch. “However, we believe the current situation in Turkey will remain relatively contained, and emerging markets’ strong fundamentals will prevail after currency and trade fears subside.” For more analysis on the economic impacts of Turkey’s currency crisis, check out our Weekly Economic Commentary.

EM currencies have endured a rough year amid ongoing trade discussions and a global risk-off sentiment, while the dollar has surged amid tightening U.S. monetary policy. U.S.—China trade tensions have further complicated matters for EM, driving the yuan 9% below its highs of 2018.

We’ve emphasized before that we expect the economic growth rate for EM this year will be the highest for any global region, and we still believe this is the case, even amid currency turmoil. EM economies as a whole are still in the early stages of an economic recovery and stand to benefit from robust consumer demand and dynamic global output changes. We also believe the U.S. and China will reach an agreement on trade that avoids any significant negative impacts to either economy.

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